Real estate investing can be lucrative, no doubt. In fact, many of the world’s billionaires have acquired their wealth through real estate.
When done right, investing in Minneapolis real estate can be a source of passive income for many years to come. Additionally, the underlying asset continues to appreciate in value over time, even as you continue paying down the mortgage.
What’s more, you’re able to protect yourself against sequence of returns risks by diversifying your asset location. As a real estate investor, you may be able to make huge tax savings by making deductions on every conceivable expense. There are also tax savings you may be entitled to that we haven’t even gotten to yet!
However, just like any other investment, real estate investing isn’t without its possible risks and downsides. For one, it’s a huge investment that requires a significant down payment and closing costs. The investment is also notoriously illiquid and thus difficult to sell. Also, to be successful, you’ll need a certain set of skills and knowledge.
Yet, being a successful real estate investor isn’t exactly rocket science!
With that in mind, here are 6 top tips to follow when considering buying an investment property in Minneapolis:
Your cash flow isn’t just your rental income minus the mortgage. Besides the mortgage, there are other expenses you’ll need to consider. Generally, expect the non-mortgage expenses to average about half your rental income.
For instance, as per the 50% rule, if your rental income is $1,100, expect 50% to go towards ongoing non-mortgage expenses. And that equates to $550. Now, supposing the mortgage is $400, you’ll then be left with a monthly profit of $150, which is a far cry from what you may have been expecting.
Aside from the mortgage, other expenses to consider include property taxes, vacancy rates, property insurance, and maintenance costs. Others are property management costs, major repairs and capital expenditures, as well as accounting, bookkeeping, and legal costs.
Don’t make the mistake of excluding property management costs. Thinking you can self-manage your rental property is a huge mistake that many novice investors tend to make.
While the 50% rule may not apply in all situations, it’s a broad rule that can help you get an overall overview of your expected cash flow.
Do you want to mess around with contractors, refinancing, and permits for a long-term mortgage? If you’re a first-time investor, this should be a no-no. Buying a turnkey property may be in your best interest.
A rent-ready or turnkey property is one that is ready for occupation by a tenant. In other words, there is no downtime, you may start earning rental income from day one!
Today’s world is increasingly connected. Anyone can buy a turnkey property from anywhere in the country by using online platforms like Roofstock.com. They even provide real estate investors who buy properties through them and provide two guarantees.
One, you have the option to return the property within the first 30 days at no cost. And two, they guarantee renting out the property to a tenant within the first 45 days of making the purchase.
Once you make an offer, sellers expect that you provide the financing details. This means that you’ll need to know how you’re going to finance the purchase even before you begin throwing offers around.
Now, the financing options you’ll have will depend on what loan you’re looking for. That is, short-term purchase rehab loan or a long-term rental property mortgage.
For a short-term rehab loan, you’ll want to go with a hard-money lender. These types of loans are fast and offer some sort of flexibility. However, on the flipside, they attract a substantial interest rate and lender fees. An alternative to this is to try sourcing finance from a local community bank.
For a long-term rental mortgage, a good option would be to go for a conventional loan. On the downside, they are not scalable beyond the first couple of properties and often have many requirements.
A seller will expect you to negotiate – it’s the rule of the game. Failing to do so will provide room for them to begin second-guessing the listing price and wondering if they underpriced it.
Of course, the first step begins with carrying proper research. As a savvy investor, find out as much about the seller as possible. Know their reason for selling, how urgently they need to sell it, and how soon they can move out once the property is sold.
Next, provide the seller with the lowest offer possible. Make sure it’s reasonable, though. The more urgent the seller is about the sale, the lower you should make that number.
And finally, don’t forget to tie in their concession into the negotiation. This can help minimize your cash due at settlement.
This is a common mistake that many first-time investors usually make. If you are looking to find a great deal, you’ll want to detach any emotional connections you may have. Remember, you have to think of the investment as a business.
In all likelihood, before finding the right deal, you may have to review a few dozen – perhaps hundreds of properties. Out of 15 properties you end up making offers on, odds are that 5 of the sellers will go to the negotiating table with you. And out of the 5, only 3 will come to agreement with you. Of the 3, chances are that 2 will fall through just before the closing, leaving you with just one successful deal for all your toil and hassle.
Have you ever managed a rental property before? If not, you’ll need to hire someone experienced in managing rentals. Successful property management requires certain skills, knowledge, and experience.
Just make sure you do your due diligence prior to hiring one, as this can make all the difference. Such as with MN Property Nerds, as we’ll take a load off your shoulders, covering every aspect of property management for you.
There you have it–6 top tips on the things you have to consider when buying an investment property in Minneapolis. Use these tips to your advantage and to help avoid potentially costly mistakes! If you need more help as an investment owner, contact MN Property Nerds and we’ll answer all your questions.